Thus it permits one to disentangle the impact nominal rigidities have on asset prices via features that limit labour market. Firmspecific capital, nominal rigidities and the business cycle. Swanson university of california, irvine workshop on asset pricing theory and computation stanford institute for theoretical economics august 19, 2019. Nominal rigidities and asset pricing michael weber march 27 2015 abstract this paper examines the asset pricing implications of nominal rigidities. This pricing equation is general in at least two senses. Second, it does not depend on any specific assumptions about the properties of asset prices, and therefore does not rely on any particular asset pricing model. This paper examines the assetpricing implications of nominal rigidities. Assessing bayesian model comparison in small samples. Nominal rigidities, asset returns, and monetary policy. The last three of these papers point to the importance of real frictions for asset prices. Nominal rigidities and asset pricing by michael weber ssrn. Price and wage rigidities increase production claim expected excess returns. Liyand francisco palominoz june 30, 20 abstract we analyze the asset pricing implications of price and wage rigidities and monetary policies in a general equilibrium model with recursive preference, nominal rigidities, and three. The calibrated model matches salient macroeconomic and asset pricing moments.
In the model when faced with a shock, rms optimal prices change and, all else equal. This paper develops an asset pricing model with heterogeneous agents and incomplete markets to study the 1970s. Nominal rigidities, asset returns, and monetary policy core. Christianoz martin eichenbaumx jesper lindojanuary 25, 2010 abstract this paper formulates and estimates a threeshock us business cycle model. Real and nominal equilibrium yield curves management science. Quantitative assessment of the role of incomplete asset.
While deliberately stylized, such a framework allows me to analyze rigorously the impact of alternative monetary policy rules on the equilibrium dynamics of asset price bubbles. However, the recent newkeynesian asset pricing pricing is silent on the impacts of di erent elasticities of demand as it mainly assumes that rms face the same elasticity. How can consumptionbased assetpricing models explain. Nominal rigidities and asset pricing michael weber. The inherent benefit of monetary unions sciencedirect. In their framework, however, asset price bubbles are not fully rational, and the optimal policy analysis not fully. The asset pricing implications of nominal rigidities and monetary policy are explored in a general equilibrium framework with recursive preferences, and productivity and policy shocks. Felipe schwartzman t he great recession gave way to a period of very low shortterm nominal and real interest rates. I i nd that new keynesian models suier from the same asset pricing shortcomings as more traditional rbc versions and that this can be attributed to the presence of nominal rigidities. The estimated model accounts for a substantial fraction of the cyclical variation in output. Another important difference is that we are concerned with nominal rigidities and constraints on monetary policy, while their approach is real. Hard to summarise such a plethora of asset pricing results. We evaluate the role of nominal rigidities in the tax code in.
Nominal rigidities, combined with permanent productivity shocks, increase expected excess returns on production claims. A systematic increase in interest rates in response to a growing bubble is shown to enhance. Economy macro noem model with complete asset markets and nominal rigidities in the spirit of clarida et al. First, it holds for any asset, including stocks, bonds, real estate property, etc. Asset pricing implications of a new keynesian model nyu stern. Merging confidential product price data at the firm level with stock returns, i document that the premium for stickyprice firms is a robust feature of the data and is not driven. We analyze the implications of nominal rigidities and monetary policy on expected asset returns of production claims, focusing on claims on all future output and profits. Generalized recursive preferences allow the model to. Firms that adjust their product prices infrequently earn a return premium of 4% per year. Nominal rigidities, combined with permanent productivity shocks, increase expected excess. We thank susanto basu, thorsten drautzburg, daniel sanches, and.
My findings provide support for workhorse models with sticky prices at policy institutions and imply that nominal rigidities are a central force for the real effects of monetary policy. Nominal rigidities, asset returns and monetary policy. Discussion nominal rigidities and asset pricing wfa monterey. It seeks to provide an analysis of asset prices with exible labour markets in the absence of nominal rigidities. Mnetary plicy and ratinal asset price bubbles 723 with the earlier literature on rational bubbles, the introduction of nominal rigidities in the form of prices set in advance makes room for the central bank to influence the real interest rate and, through it, the size of the bubble. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations. Demand elasticities, nominal rigidities and asset prices job. Nominal rigidities and investment rahul nathy may, 2018 abstract this paper derives explicitly an equity pricing relationship in a simple new keynesian model. Demand elasticities, nominal rigidities and asset prices job market paper nuno clara november, 2019 abstract i study heterogeneity in demand elasticities as a source of risk in asset pricing.
Firmspecific capital, nominal rigidities and the business cycle david altig, lawrence christiano, martin eichenbaum, jesper linde. Nominal rigidities here amplify the effect of demand shocks such as the proposed monetary policy shock. This paper examines the asset pricing implications of nominal rigidities. As in a phelpslucas island model, nal producers look at the prices of their local inputs to infer. Assetpricing implications of nominal rigidities are explored in equilibrium model. Since this natural rate is not itself a function of central bank decisions, it can be used as a yardstick for the stance of. Thus, our results suggest that if nominal rigidities are needed to match stylized facts of goods and labor markets, then demand shocks are needed to generate large risk premia, a stylized fact of asset prices. Inflation and the price of real assets stanford university. Asset pricing model capm cannot explain the level of portfolio. While the relation between sticky prices and asset pricing has. Wage rigidities and permanent shocks alex hsuy, erica x. How can consumptionbased assetpricing models explain low.
New keynesian model, equity premium, nominal rigidities, sticky prices, capital adjustment costs. Second, it shows how standard dynamic macroeconomic. On the other hand, nominal rigidities, that slow down price adjustment to shocks, increases risk premia when the economy is hit by productivity shocks, but reduces risk premia in the presence of monetary policy shocks. To rationalize these facts, i develop a multisector productionbased asset pricing model with sectors differing in their frequency of price adjustment.
Uc berkeley no 53, 2014 meeting papers from society for economic dynamics abstract. Michael weber additional contact information michael weber. Liyand francisco palominoz june 16, 2014 abstract asset return implications of nominal price and wage rigidities are analyzed in general equilibrium. The second chapter examines the asset pricing implications of nominal rigidities. Merging unique productprice data at the firm level with stock returns, i document that the premium for stickyprice firms is a robust feature of the data and varies substantially over the business cycle. Macroeconomic and microeconomic data paint conflicting pictures of price behavior.
I calibrate the benchmark model to generate reasonable macroeconomic and asset pricing moments. November 5, 20 job market paper abstract this paper examines the asset pricing implications of nominal rigidities. December 2012 abstract we study a heterogeneous agents model that combines matching frictions in the labor market with incomplete asset markets and nominal rigidities. In this note, w\ e investigate the negative response of a central bank to share prices. Li z, and francisco palomino x april 12, 2016 abstract the links between real and nominal bond risk premia and macroeconomic dynamics are explored quantitatively in a model with nominal rigidities and monetary policy. As a consequence, we typically do not look into the relation between demand elasticity, nominal rigidities and asset prices. The central bank varies the nominal interest rate in order to regulate the e ective risk aversion of. This paper derives explicitly an equity pricing relationship in a simple new keynesian model. This paper quantitatively explores the role of external habits, nominal rigidities, and monetary policy for real and nominal bond yields in an asset pricing endogenous growth model. Thus, our results suggest that if nominal rigidities are needed to match stylized facts of goods and labor markets, then demand shocks are needed to generate large risk premia, a stylized fact of asset. Nominal rigidities increase asset return premia for permanent productivity shocks. Asset pricing implications of a new keynesian model.
Asset return implications of nominal price and wage rigidities are analyzed in general equilibrium. I find that firms that adjust their product prices infrequently earn a crosssectional return premium of more than 4% per year. Uc berkeley no 53, 2014 meeting papers from society for economic dynamics. Nominal rigidities create operational leverage in rms and therefore create a role for demand elasticity to matter for rm fundamentals and crosssectional asset pricing. Nominal rigidities are then a natural candidate to introduce frictions in the production sector to understand the dynamics of asset returns and their link to monetary policy. Asset prices, nominal rigidities, and monetary policy. Even with this small marginal extension, an important result emerges. In this paper, we provide a dynamic asset pricing model of the risk premium channel of monetary policy. Michael does every asset pricing test imaginable to check the robustness of his mechanism.
Merging unique productprice data at the firm level with stock returns, i document that the premium for stickyprice firms is a robust feature of the data and varies substantially. November 21, 20 abstract this paper examines the assetpricing implications of nominal rigidities. Asset prices, nominal rigidities, and monetary policy sciencedirect. Nominal rigidities, asset returns, and monetary policy erica x. I nd that new keynesian models su er from the same asset pricing shortcomings as more tradi. Weber, michael, nominal rigidities and asset pricing march 27, 2015.
Weber, michael, nominal rigidities and asset pricing october 28. How can consumptionbased asset pricing models explain low interest rates. I use highfrequency product price and quantity data from amazon to overcome the classical. Price dispersion, private uncertainty and endogenous nominal. A macroeconomic model of equities and real, nominal, and. We build on earlier work that has stressed the interaction of taxes and in. In this paper, we study a quartet of asset pricing models in both nominal and real economies. However, prices do not always change when costs change, so there is substantial variation in realized markups. Nominal rigidities play a central role in macroeconomics to explain.
A theory of macroprudential policies in the presence of. My results show that nominal rigidities are not only central in macroeconomics for business cycle fluctuations and the real effects of nominal shocks but are also a strong determinant of the. Equity pricing new keynesian models with nominal rigidities. Nominal rigidities and asset pricing kit econstartseite.
Firmspecic capital, nominal rigidities and the business cycle david altigy lawrence j. E01,e44,g21,g32 abstract this paper addresses the proper measurement of financial service output that is not priced explicitly. As the recovery proceeds and the federal reserve starts to decide the rhythm with which it intends to raise policy rates, one fundamental question is. The effects of nominal rigidities on expected excess returns can be understood by the impact of these rigidities on the pricing kernel, output, labor, and production markups. As documented below, the stability of net positions masks substantial increases in gross borrowing and lending within the household sector. This paper studies the turbulence of the 1970s using an asset pricing model with heterogenous. Asset pricing model capm cannot explain the level of portfolio returns, but it can explain the crosssectional dispersion. Discussion nominal rigidities and asset pricing wfa. Finance and economics discussion series divisions of.
This relationship is used to study the equity pricing implications of new keynesian models. The central bank varies the nominal interest rate in order to regulate the e ective risk aversion of the marginal investor in the economy. I find that firms that adjust their product prices infrequently earn a crosssectional. A quartet of asset pricing models in nominal and real economies. While the relation between sticky prices and asset pricing has been studied in the literature namely weber 2015 and gorodnichenko and. How can consumptionbased assetpricing models explain low interest rates. The key elements of the model are that households di. A systematic increase in interest rates in response to. November 21, 20 abstract this paper examines the asset pricing implications of nominal rigidities. Introduction model asset prices discussion conclusions a macroeconomic model of equities and real, nominal, and defaultable debt eric t.
A generalequilibrium asset pricing approach to the measurement of nominal and real bank output j. A quartet of asset pricing models in nominal and real. Demand elasticities, nominal rigidities and asset prices. We have considered only one nominal rigidity and one extra shock, an idiosyncratic monetary policy shock.
Price dispersion, private uncertainty and endogenous nominal rigidities gaetano gaballo november 26, 2016 abstract this paper shows that when agents learn from prices, large private uncertainty may result from a small amount of heterogeneity. Under complete international asset markets, capital accumulation gives households in both countries a margin of intertemporal adjustment, thereby making the. This paper analyzes this question from the vantage point of equilibrium determinacy. Rational asset price bubbles by jordi gali i examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. Main takeaway is portfolio return of sticky versus nonsticky rms main results portfolio of rms with exible prices have lower average returns going long sticky and short exible. Strikingly, prices rarely change unless there is a change in cost.
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